In the fall, Jay Thompson decided to live in a uni- versity dormitory. He signed
ID: 1217929 • Letter: I
Question
In the fall, Jay Thompson decided to live in a uni- versity dormitory. He signed a dorm contract under which he was obligated to pay the room rent for the full college year. One clause stated that if he moved out during the year, he could sell his dorm contract to another student who would move into the dormitory as his replacement. The dorm cost was $5000 for the two semesters, which Jay had already paid.
A month after he moved into the dorm, he decided he would prefer to live in an apartment. That week, after some searching for a replacement to fulfill his dorm contract, Jay had two offers. One student of- fered to move in immediately and to pay Jay $300 per month for the eight remaining months of the school year. A second student offered to move in the second' semester and pay $2500 to Jay.
Jay estimates his food cost per month is $500 if he lives in the dorm and $450 if he lives in an
apartment with three other students. His share of the apartment rent and utilities will be $400 per month. Assume each semester is 41/2months long. Disregard the small differences in the timing of the disburse- ments or receipts.
(a) What are the three alternatives available to Jay?
(b) Evaluate the cost for each of the alternatives.
(c) What do you recommend that Jay do?
Explanation / Answer
ans a)
Three alternatives are
1) to live in dormitory for whole year
2) to give dormintory to 1 st student and move to apartment after 1 st month
3) to give dormintory to 2nd student and move to apartment after 1 st sem
ans b)
costs of each alternative
1) to live in dormitory for whole year
cost in each includes net rent+ food cost
cost = 5000 + 500*9 = 9500
2) to give dormintory to 1 st student and move to apartment after 1 st month
cost = 5000-300* 8 +400*8 +500*1 + 450*8 = 5000- 2400 + 3200 +500 +3600 = 9900
3) to give dormintory to 2nd student and move to apartment after 1 st sem
cost = 5000- 2500 +400*4.5 + 500*4.5 +450* 4.5 = 5000-2500 +1800 +2250 + 2025= 8575
ans c)
third alternative is beat for jay as it has least cost